Big Tech is cut down to size
The recent rally in technology stocks could come to a screeching halt at the opening bell on Wednesday. Overnight, investors dumped portions of their tech portfolios after disappointing results from Alphabet, Microsoft and Texas Instruments, with the trio reporting that a slowing global economy continues to batter demand for digital advertising, cloud computing and chips.
Over the past seven trading sessions, investors piled back into tech stocks, pushing the Nasdaq up 8.5 percent on hopes the tech giants would show that the worst of the downturn was behind them.
Those investors were greatly disappointed. Microsoft’s sales rose at their slowest rate in five years, as rising energy costs and a strong dollar ate into profits. And Alphabet, the parent company of Google, missed analyst expectations and said growth in its core advertising business had slowed to its weakest point since 2013 (apart from a short period at the start of the pandemic), as companies slashed marketing budgets.
Sundar Pichai, Alphabet’s C.E.O., told analysts that it would be “responsive to the economic environment.” Translation: Expect more cost cuts and layoffs. “We are reviewing projects at all scales pretty granularly to make sure we have the right plans there,” Pichai said, “and, based on that, the right resourcing, and making course corrections.”
The global chip market continues to look turbulent, too. Texas Instruments downgraded its full-year outlook as demand softens for its microprocessors, which power consumer products and industrial machinery.
The weak results point to the challenges facing Big Tech, which thrived during an era of low interest rates, low energy prices and low inflation. Investors will be looking for further signs of the sector’s health when Facebook’s owner Meta reports earnings on Wednesday; Apple and Amazon are scheduled for Thursday.
Some big-name investors have been losing patience, even before the latest quarterly results rolled in. Brad Gerstner, head of the hedge fund Altimeter and a large investor in Meta, published an open letter earlier this week to Mark Zuckerberg, the company’s C.E.O., calling for the company to reduce spending by $5 billion annually, limit its investment in metaverse-related projects at $5 billion each year, and cut staff by at least 20 percent.
“Meta needs to rebuild confidence with investors, employees and the tech community in order to attract, inspire, and retain the best people in the world. In short, Meta needs to get fit and focused,” Gerstner wrote.
HERE’S WHAT’S HAPPENING
Britain moves back its fiscal budget announcement to Nov. 17. The two-week delay comes a day after Rishi Sunak was appointed prime minister, and is meant to give him and his new-ish chancellor, Jeremy Hunt, time to review their plans. The pound remained stable on the news.
What Happened to Elon Musk’s Twitter Deal
A blockbuster deal. In April, Elon Musk made an unsolicited bid worth more than $40 billion for the social network, saying he wanted to make Twitter a private company and allow people to speak more freely on the service.
Bed Bath & Beyond picks a permanent C.E.O. Sue Gove, who took the chief executive role on an interim basis four months ago, will now officially lead the struggling retailer. She will have to continue overseeing the company’s efforts to turn around its fortunes, which include store closures, layoffs and expensive financial maneuvers.
U.S. officials accuse Saudi Arabia of flip-flopping on oil production. The Biden administration believed it had reached a secret deal with Riyadh over the summer to boost oil production and lower energy prices, The Times reports. The Saudi-led OPEC Plus instead said it would cut production, leaving American officials fuming at what they said was a broken promise.
Intel’s autonomous vehicle technology arm prices its I.P.O. above expectations. Mobileye sold shares to investors at $21 each, valuing the company at $16.7 billion. It marks a rare bright spot for the I.P.O. market, which has been largely quiet amid stock volatility. Mobileye will trade on the Nasdaq under the ticker symbol MBLY.
Apple will follow an E.U. order to switch iPhone chargers. Greg Joswiak, the tech giant’s marketing chief, said at a Wall Street Journal conference that the company would begin using USB-C technology instead of its proprietary Lightning connector. E.U. officials say the directive will reduce electronic waste; Apple has argued it would stifle innovation.
The rapidly shrinking Ye empire
Adidas’s move on Tuesday to immediately cut ties with Kanye West, now known as Ye, was a key moment in businesses wrangling with too-hot-to-handle provocateurs. New estimates show how much the rapper and designer’s recent behavior, including antisemitic remarks and publicly wearing a shirt with a slogan tied to white supremacy, will cost him financially.
Here are three calculations of how much Ye stands to lose:
The Morningstar analyst David Swartz estimated that the Adidas-Yeezy partnership likely paid Ye in excess of $100 million a year. Overall, Swartz put the collaboration’s value at up to $2 billion.
Forbes reckoned that Adidas-Yeezy accounted for $1.5 billion of Ye’s net worth, and that its demise knocked his wealth down to $400 million.
Bloomberg reported that Adidas-Yeezy earned Ye over $500 million in royalty payments and marketing fees during the first four full years of the deal, through 2020.
Adidas is now indicating that it will sell existing Yeezy merchandise — only without the Yeezy branding. (The German sportswear giant said yesterday that it was the “sole owner” of all design rights to existing products that came out of the partnership.)
More shoes have dropped for Ye. Gap, whose partnership with him ended last month, said it was taking “immediate steps” to remove Yeezy Gap products from its stores and had shut down an affiliated website.
Where have the “heavy tweeters” gone?
Reports that Elon Musk has told his bankers he plans to close his $44 billion deal to buy Twitter by Friday is giving the social network’s shares a boost in premarket trading this morning, and they are outperforming most tech stocks. But for Musk, it’s becoming clearer he’ll have a load of problems to solve if he gets to the finish line.
Twitter’s shares closed at $52.78 yesterday, up 2.4 percent and close to Musk’s deal price of $54.20 a share. The reason for investor optimism: Musk is said to have told the bankers helping to finance his takeover that he will meet a court-set deadline to seal the transaction by Friday. (Another potentially positive development: The banks are also said to have sent paperwork to equity investors involved in the deal.)
If Musk doesn’t meet that deadline, he’ll have to finally go through with a trial that could compel him to close on the transaction. DealBook’s Lauren Hirsch takes a look at Judge Kathaleen St. J. McCormick, who has overseen the legal wrangling between Twitter and Musk over the last several months and would supervise that trial.
Internal Twitter documents suggest there may be trouble ahead. Company research showed that “heavy tweeters,” who make up less than 10 percent of monthly overall users but send 90 percent of all tweets and generate half of all revenue, have been in “absolute decline” since the pandemic, according to Reuters.
The negative trend may have been masked by overall growth in daily active users, Reuters reports. A Twitter representative indeed noted that the company’s “overall audience has continued to grow.”
But that growth may not be enough to boost the company’s bottom line. “Even without any Musk-related drama, Twitter will face challenges. The company rarely turns a profit, and growth has been slow for years,” writes The Times’s Kevin Roose, who notes that all of the big social media apps are struggling after a decade of dominance.
Ash Carter, the Pentagon’s bridge to Silicon Valley
Ashton Carter, a secretary of defense under President Barack Obama, died on Monday at 68. Though perhaps best known for further opening the U.S. military to women and transgender service members, Carter also focused on building a bridge between the Pentagon and Silicon Valley.
Carter was uniquely qualified to do so. He trained as a theoretical physicist, but gained an interest in policy during his time as a Rhodes scholar at Oxford University. He first joined the Pentagon during the Clinton administration, rising through the ranks as a weapons-buying official and expert in nuclear matters, before being nominated as defense secretary by Obama in 2014.
He came to believe that the Pentagon needed Big Tech, particularly to bolster the military’s expertise in artificial intelligence and other advances. “When I began my career, most technology of consequence originated in America, and much of that was sponsored by the government, especially the Defense Department,” he said in a 2015 speech. “Today, much more technology is commercial.”
In his first two years as defense secretary, Carter visited Silicon Valley more times than his predecessors had over two decades. He invoked ideas like “centaur warfighting,” where A.I. augments human capabilities, and sought to convince younger generations of tech executives to partner with the Pentagon. (Many Silicon Valley engineers remain skeptical of letting their work be used by the military, though their employers have still pursued big military contracts.)
“Ash was the best-prepared secretary of defense in our history,” Graham Allison, who worked alongside Carter at Harvard and the Pentagon, told The Times.
THE SPEED READ
The FTX founder Sam Bankman-Fried is in discussions to raise cash as he scans the devastated crypto sector for acquisition targets. (WSJ)
The London-listed furniture retailer Made.com is on the brink of collapse a year after an I.P.O. valued it at 775 million pounds ($900 million). (FT)
Zara’s owner, Inditex, has found a buyer for its Russian business. (Bloomberg)
A trial pitting Uyghur activists against the U.K. government began yesterday, the first of a wave of legal cases in Europe to block imports of cotton products from Xinjiang, China. (FT)
The Putin confidant who vented his frustration to the Russian president about a string of battlefield losses is revealed. (WaPo)
“High prices, slow speeds and fraud” continue to plague Washington’s $17 billion effort to close the digital divide. (WaPo)
Best of the rest
Just 26 of 193 countries that agreed last year to step up their efforts to fight climate change have followed through, the U.N. said. (NYT)
Want an electric Hummer? Be prepared to pay more than $100,000 over list price. (Insider)
Settle in for “The Crypto Story,” a lengthy dive into cryptocurrency by Matt Levine of the “Money Stuff” newsletter. (Bloomberg Businessweek)
Warner Bros. Discovery finally picked the director James Gunn and the producer Peter Safran to lead its struggling DC film studio. (Variety)
“The Try Guys and the Prison of Online Fame” (NYT)
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